Hawala

Also referred to as “underground banking”, hawala is basically a parallel money transfer channel that usually functions as an illegal alternative to banks and other financial setups. It’s an unofficial money-transfer system that’s popular in developing and poor countries where there’s no formal banking, or the banking system is heavily regulated or too expensive. It’s a system primarily based on trust since there’s no accounted money involved. People generally carry out hawala transactions through individuals who they trust or know, such as friends, family members, relatives, etc.

The dealers carrying out this money transfer system are called hawala dealers or hawaldars, who charge commissions for the services rendered. Illegal immigrants who cannot legally approach a bank to transfer money, individuals who want to evade taxes, etc. take the hawala route. The comparatively low commission charges, quick money transfer (usually a couple of days), simple and hassle-free transactions, no identification proof and income source disclosure requirement, better exchange rates on offer compared to official rates, etc. are reasons why hawala still exists, despite its unlawful nature.

Hawala Working Mechanism

In a hawala transaction, there’s no actual movement of funds from source to destination location, unlike traditional banking methods. When an individual wants to transfer money through hawala, he gets in touch with a hawala dealer in his local region, who checks if there’s a dealer in the destination area. Once confirmed, the transferor gives the money to the local dealer. The local hawaldar then informs receipt to the dealer at the destination location through a phone call or fax and instructs him to transfer an equivalent sum to the actual recipient or transferee.

The Practice

Hawala is not illegal in all places. In fact, there are countries that practice hawala openly and also advertise hawala services. Hawala is most popular in South Asia, which existed as the primary money transfer method before traditional banking systems took shape. The word “hawala” is primarily used in the Middle East. Different countries may use other terms to denote transactions of such nature – for instance, hundi (India), phei kwan (Thailand).

Why is Hawala Illegal in Most Countries?

Hawala is considered illegal for the money laundering part. The fact that individuals can transfer money anonymously and not through banks or other regulated financial institutions makes hawala illegal, as the government is kept in the dark and is not paid taxes on the funds.

Generally, the hawala network is extensively used for circulating black money and to offer funding for illegal activities such as terrorism, smuggling and drug trafficking. However, regular people also resort to hawala if they find the traditional banking or financial system expensive or inconvenient.